Earnings season is officially here, folks!
Microsoft and Alphabet will report their third-quarter financial results after the bell today, and Meta and Amazon will report later this week. And we can’t wait to find out if these companies will report a material improvement from their investments in AI-related computing tasks and products.
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We asked a similar question before Q2 2023 results came out and found that while the costs related to AI work were piling up, the resulting revenue was more a fact of the future than the present. Will we see similar themes this time as well?
You see, there’s a big difference between customers being excited about a new technology and tech actually bringing in gobs of revenue. We’re hoping to find out how quickly some of the largest and richest tech companies are able to convert this market interest around AI to revenue.
Big Tech’s ability to sell AI-powered tools and services will tell us pretty clearly just how ready the tech-buying market is to spend on new software. For startups, then, a solid result from Microsoft and Alphabet on the AI front would be great news. On the other hand, yet another quarter of Big Tech companies spending heavily on infrastructure paired with discussions of future revenue would be less bullish.
There are signs that the AI market for private tech companies is warm right now. Ali Ghodsi, the CEO of Databricks, which recently snapped up data replication startup Arcion for $100 million, noted in an interview yesterday that his company is having a killer quarter.
Per a transcript of the conversation between Ghodsi and CNBC’s Jon Fortt:
What we’re seeing now is the buying signals are crazy. This particular quarter for us has been one of our strongest in a very, very long time. And that’s actually [based] on consumption, not just [customers buying] new software. It’s actually how they’re consuming the software [that] is increasing significantly. So, it seems markets are coming back very, very fast, at least if you’re doing data and AI[.]
We usually use public company results and comments to help us understand the market that startups might be working in, but Databricks sits between the two camps as a massive company that’s still private. Perhaps its comments are an indication that both smaller and larger (public) tech companies that deal with AI and related work are seeing strong results?
If so, we can expect Alphabet and Microsoft to note their progress. Last quarter, the latter attributed a single percentage point of growth in Azure to its recent AI work. The company expects two percentage points of growth in the third quarter.
The good news is that Databricks is seeing companies build more substantive AI-powered apps and tools than it was just a few months ago. Likening the release of ChatGPT as an “iPhone moment” that has led to lots of folks building applications similar to how we saw a bunch of flashlight apps when the first iPhone landed, Ghodsi said in the CNBC interview that companies are now asking Databricks:
[W]hat data do we have that our competitors don’t have? Could we leverage that in a strategic way so that we can gain competitive advantage against them? . . . Nine months in, people are being much more strategic and thinking it through and they don’t want to just do anything AI anymore, which I think is a really, really good sign. I still think it takes a while, especially in large enterprises [that] take a long while to land these projects, make them successful, get them into production. It doesn’t happen overnight. But it’s looking very promising.
That’s certainly good news for AI startups, but it also indicates that there’s more to come — even though Databricks is already seeing strong, positive market signals. So, I think that we should anticipate some hard results and more commentary about future demand from the companies behind Azure, AWS, and Google Cloud.
Major cloud companies are spending billions on the computing capacity for AI-related work, and the fruits of that labor must be collected at some point. I’m happy that we only have to wait until later today to find out how much lift they have provided thus far and if there’s more to be expected in the near future.